EDUCATIONAL PTY LTD And COMMISSIONER OF TAXATION

[2011] AATA 445

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 445

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2010/5166

TAXATION APPEALS DIVISION		)
Re		EDUCATIONAL PTY LTD

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Deputy President P E Hack SC

Date27 June 2011

PlaceBrisbane (heard in Cairns)

Decision The decision under review is affirmed.

..............Signed.................

Deputy President

CATCHWORDS

TAXATION – Income tax – GST – whether applicant carrying on an enterprise – decision under review affirmed

A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-20, 11-5, 11-15, 11-20, 23-10, 195-1

Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83; (2006) 197 FLR 74; 2006 ATC 4160

FCT v Swansea Services Pty Ltd [2009] FCA 402; 2009 ATC 20-100

Russell v FCT [2011] FCAFC 10

Spriggs v FCT [2009] HCA 22; (2009) 239 CLR 1

REASONS FOR DECISION

27 June 2011 Deputy President P E Hack SC    

Introduction

1.In September 2003 the applicant, Educational Pty Ltd (Educational), acquired real property at El Arish, south of Cairns known as “Dundee Park”. The property, some 63 acres in size, had formerly been used as a fauna park but that use had ceased some time prior to its purchase by Educational and the property and its improvements were quite rundown. The directors of Educational, Dr Thomas Bauer and Mrs Lina Bauer, intended to convert the property into an educational and accommodation centre.

2.The issue in these proceedings is whether, in the period after acquisition, Educational was “carrying on an enterprise” as that expression is used in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act).

Background

3.The background to the proceedings is not in issue. Educational became registered for GST in 2003 prior to the completion of the purchase. It lodged quarterly business activity statements. Between 1 October 2005 and 30 June 2009 Educational reported taxable supplies of $6,029. In the same period it claimed input tax credits i.e. GST paid on creditable acquisitions, in excess of $30,000. In 2009 the Commissioner commenced an audit into Educational’s affairs. There was, it was said, “reason to doubt that an enterprise exists”.

4.The audit was completed in April 2010. The Commissioner decided that Educational was not carrying on an enterprise and was accordingly not entitled to claim input tax credits of $30,062 claimed in the period from October 2005 to June 2009. The Commissioner made an assessment of net amount payable, evidenced by a notice of assessment dated 14 April 2010 requiring Educational to pay $30,062. The Commissioner, generously, it might be thought, concluded that Educational had taken reasonable care with its affairs and was thus not liable for an administrative penalty for the tax shortfall. Educational objected to the assessment on 15 June 2010.

5.The objection was successful to the extent that the Commissioner accepted that amounts referable to periods prior to 1 January 2006 were not payable by operation of the time limit in s 105-50 of Schedule 1 to the Taxation Administration Act 1953 (Cth). The Commissioner’s decision, made on 6 October 2010, disallowed the objection so far as it concerned periods from 1 January 2006 onwards.

6.Educational seeks a review of the Commissioner’s objection decision.

The legislation

7.The concept of “carrying on an enterprise” is fundamental to the GST Act. By virtue of s 23-10 of that Act, an entity may be registered under the Act (as Educational was) if it is carrying on an enterprise or if it intends to carry on an enterprise from a particular date.

8.An entity is entitled to input tax credit for any “creditable acquisition” it makes[1]. A creditable acquisition is made if,

“(a)you acquire anything solely or partly for a creditable purpose; and

(b)the supply of the thing to you is a taxable supply; and

(c)you provide, or are liable to provide, consideration for the supply; and

(d)you are registered, or required to be registered.”[2]

[1] See s 11-20, GST Act.

[2] See s 11-5, GST Act.

A thing is acquired for a “creditable purpose” to the extent that it is acquired in “carrying on your enterprise”[3] however a thing is not acquired for a creditable purpose to the extent that the acquisition was of a private or domestic nature[4].

[3] See s 11-15(1), GST Act.

[4] See s 11-15(2), GST Act.

9.The expression “carrying on” is defined in s 195-1 of the GST Act as including “…doing anything in the course of the commencement or termination of the enterprise”. So far as is presently material, the term “enterprise” is defined in s 9-20(1) of the GST Act as follows:

“(1)An enterprise is an activity, or series of activities, done:

(a)  in the form of a business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)  on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d)…

(2)  However, enterprise does not include an activity, or series of activities, done:

(a)  …

(b)  as a private recreational pursuit or hobby; or

(c)…”

10.The term “business” is defined in s195-1 of the GST Act as including “…any profession, trade, employment, vocation or calling, but does not include occupation as an employee”.

11.Finally, and by virtue of s 14ZZK of the Taxation Administration Act 1953 (Cth) Educational bears the onus of showing that the assessment was excessive.

Carrying on an enterprise

12.In the period in issue in these proceedings Educational expended monies. But the question is whether it engaged in activities that were done in the form of a business. I do not doubt the sincerity of Dr Bauer and Mrs Bauer in wanting to establish an educational facility at Dundee Park but I am well short of being satisfied that there were activities done in the form of a business.

13.There is support in the cases[5] for the proposition that the words “in the form of” extend the reach of enterprise to activities which would not, in the ordinary meaning of business, be considered such. And it is to be remembered that carrying on an enterprise includes doing anything in the course of the commencement of the enterprise. But, as the decision in Russell v FCT[6] makes clear,

“commencement of the enterprise is not necessarily the same thing as taking a step in preparation for such commencement”.

[5] Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83; (2006) 197 FLR 74; 2006 ATC 4160 at [69]; FCT v Swansea Services Pty Ltd [2009] FCA 402; 2009 ATC 20-100 at [99].

[6] [2011] FCAFC 10 at [71].

The present case, if anything, is a case about preparation for commencement, not commencement itself.

14.The decision of the High Court in Spriggs v FCT[7], although concerned with issues of deductibility, offers helpful guidance as to the existence of a business. The plurality said[8]:

“The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner. [footnotes omitted]

[7] [2009] HCA 22; (2009) 239 CLR 1.

[8] At [59].

15.Here Educational says that its enterprise was one of educational facility that specialises in immersion teaching. Yet it is impossible to discern any profit-making purpose in its activities in the period under review. In that time it expended very considerable sums in capital and non-capital expenditure yet received no payment for the provision of educational facilities. Its miniscule income came from hiring out its premises for a birthday party. In the period after that in issue here it has still not produced any income from undertaking educational activities, its income is still limited to, in effect, venue hire.

16.To date no students have been accepted, and no courses offered, at Dundee Park. Such promotion of the facility as was undertaken was undertaken by word of mouth. Moreover while Educational sought and obtained local authority approval for a material change in use to “educational establishment” in August 2004 it never obtained the consent of the local authority to provide accommodation. That consent was made necessary by clause 6 of the Johnstone Shire Council Local Law No 18. The position was only regularised in January 2010 when the local authority, now called the Cassowary Coast Regional Council, agreed to treat Dundee Park as a residential college.

17.The evidence indicates that the venture, although well motivated, lacked commercial character. Dr Bauer resides and is employed in Hong Kong and visits Australia during his annual leave for 6-7 weeks of the year. Mrs Bauer used to reside in Hong Kong and has lived at Dundee Park only from July 2008 onwards. The absence of approval to provide accommodation has already been noted. It seems fair to say that the directors are more motivated by educational and environmental objectives than by commercial objectives.   

18.In the period in issue Educational had receipts of some $6,000 and expenses in excess of $391,000. The contrast is stark.

19.Educational has, to date, made no supply of what it says is its enterprise – an educational academy. Its activities are indeed on a small scale. It appears to have first created a document setting out its fee structure after the Commissioner commenced the audit. The same is true of its business plan. I find the evidence of the proposed visit by students from Hong Kong in July and August 2006 quite unconvincing. 

20.The Commissioner submits that Educational “has not undertaken business-like activities in a business-like manner”. That seems to me to be true although it is not every case where an absence of a “business-like manner” is significant. Even the poor planner can carry on an enterprise. But in the present case the activities undertaken to progress the claimed enterprise may fairly be described as desultory. There is, in reality, no evidence of any system or any degree of planning.

21.It may be accepted, as educational submits, that the local area has experienced a downturn in tourism activities as a result of world events and adverse local weather. These matters might explain, were explanation necessary, a slowdown in an enterprise. Here it seems more likely that they explain why the planned enterprise has never got going.

22.I am then not satisfied that Educational was carrying on an enterprise at the material times. It is thus unnecessary to consider the Commissioner’s alternative arguments. I will affirm the objection decision.     

I certify that the 22 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC

Signed:         ............Signed...........................................................
  Associate

Date of Hearing  7 June 2011
Date of Decision  27 June 2011
Applicant  Represented by its director, Dr Bauer
Counsel for the Respondent     Mr M Ballans
Solicitors for the Respondent    ATO Legal Services Branch